1. Slide 12.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 12 Ownership interest

2. Slide 12.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Non-current (fixed) assets plus Current assets minus Current liabilities minus Liabilities due after one year equals Ownership Interest [Share capital plus Reserves of past profits] Structure of a statement of financial position

3. Slide 12.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Statement of financial position of Safe and Sure plc 370.4464.3 Equity holders’ funds 340.8431.615Retained earnings 4.6 14Revaluation reserve 5.58.513Share premium accountReserves 19.519.612Called-up share capitalCapital and £m Year 6Year 7Notes

4. Slide 12.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Issue of shares at the date of incorporation When company first comes into existence: it issues shares to the owners, who become shareholders. Each share has a named value which is called its nominal value (par value)

5. Slide 12.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Certificate number 24516 Public Company plc SHARE CERTIFICATE This is to certify that J A Smith is the registered owner of 100,000 ordinary shares of 25 pence each, Signed P McDowall Company Secretary Given under Seal of the Company the 15th day of August 1985 J Jones W Brown Directors Share certificate

6. Slide 12.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 J A Smith has paid £25,000 to the company. That is the limit of this person's liability if the company fails. The company issues 100,000 shares to J A Smith at a price of 25 pence each. The shares represent the ownership interest in the company. Assets – Liabilities =Ownership interest Increase in cash £25,000 Increase in nominal value of shares £25,000 Share certificate (Continued) 

7. Slide 12.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Some time later… Company has traded profitably: Company wishes to raise as much funds as possible. Will issue shares at their market value. Nominal value remains the same, the market value may be quite different. Nominal value 25 pence but the shares are selling in the market at 80 pence each.

8. Slide 12.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Share premium Share Premium = Amount per share above nominal value = (80p – 25p) = 55p per share. Company issues 200,000 new shares. It will collect (200,000 shares x 80p) = £160,000 in cash. Total share premium 55 pence per share × 200,000 shares = £110,000 Total nominal value 25 pence per share × 200,000 shares = £50,000

9. Slide 12.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Share premium (Continued) Increase in nominal value of shares £50,000 and increase in share premium £110,000 Increase in cash £160,000 Assets – Liabilities = Ownership interest 

10. Slide 12.10 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Revaluation Hotel cost is £560,000. The hotel is run successfully for a period of three years and at the end of that period a professional valuer confirms that the hotel, if sold, would probably result in sale proceeds of £620,000. The directors of the company may wish to tell shareholders about this increased market value of the company's (fixed) asset.

11. Slide 12.11 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Revaluation – choices 1.Keep the reported value at £560,000 (the historical cost) but include a note to the statement of financial position explaining that the market value is £620,000. 2. Alternative treatment is to RECOGNISE in financial statements the increase in value. But not a realised profit.

12. Slide 12.12 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Recognise increase in value – not ‘realised’ Increase in revaluation reserve as part of the ownership interest £60,000 Increase in value of non- current (fixed) asset £60,000 Assets – Liabilities = Ownership  Interest

13. Slide 12.13 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Foreign currency gains & losses Gains or losses resulting from changes in the rates of exchange with regard to assets held and liabilities owed and denominated in a different currency. Loans $6m when rate of exchange is £1 = $2 Liability expressed in £ = (6 × 1/2) = £3m Rate of exchange changes to £1 = $3 Liability expressed in £ = (6 × 1/3) = £2m

14. Slide 12.14 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Foreign currency (Continued) Assets – Liabilities ↓ = Ownership interest ↑ Gain of £1m but not a realised gain

15. Slide 12.15 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Example A company, Office Owner Ltd, is formed on 1 January Year 1 by the issue of 4m ordinary shares of 25 pence nominal value each. The cash raised from the issue is used on 2 January to buy an office block which is rented to a customer for an annual rent of £50,000. The tenant carries all costs of repairs. The company's administration costs for the year are £10,000. At the end of the year the office block is valued by an expert at £1,015,000. On the last day of the year the company issues a further 2m ordinary shares at a price of 40 pence each, to raise cash for expansion plans in Year 2.

16. Slide 12.16 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DateTransaction or eventEffect on Year 1AssetsOwnership interest Jan. 1Issue of shares at nominal value Increase asset of cashIncrease share capital at nominal value Jan. 2Purchase of office block Increase asset property. Decrease asset of cash No impact Jan.– Dec. Rent receivedIncrease asset of cashRevenue of the period Jan. – Dec. Administration costsDecrease asset of cashExpense of the period Dec. 31Revaluation of assetIncrease asset of property Increase ownership interest by revaluation Dec. 31Issue of further sharesIncrease asset of cashIncrease share capital at nominal value and increase share premium Analysis of transactions for Year 1 Table 12.1 Office Owner Ltd – analysis of transactions for Year 1 Increase asset of cash

17. Slide 12.17 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DateTransactionCashOfficeSCS,PremRet.Rev Year 1£000’s Jan 1Issue of shares1,000 Jan 2Purchase of office block (1,000)1,000 Jan- Dec Rent received50 Jan – Dec Administration costs (10) Dec 31Revaluation of asset 15 Dec 31Issue of further shares 800500300 8401,0151,5003004015 1,855 Analysis of transactions for Year 1 (Continued) Table 12.2 Office Owner Ltd – spreadsheet of transactions for Year 1

18. Slide 12.18 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Office Owner Ltd £000’s Fixed asset: Office block1,015 Current asset: Cash840 Net assets1,855 Share capital1,500 Share premium300Reserves Revaluation reserve15 Retained earnings 40 1,855 Balance sheet at end of year Year 1

19. Slide 12.19 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Additional primary financial statements (A)IASB standards: Statement of changes in equity. (B) UK ASB standards: Statement of total recognised gains and losses (STRGL).

20. Slide 12.20 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Statement of changes in equity Must report (a) Profit or loss for the period (b)Items of income and expense for the period required to be reported directly through equity (c)Effects of changes in accounting policies and correction of errors. A statement reporting (a) + (b) + (c) also called a statement of comprehensive income.

21. Slide 12.21 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Statement of changes in equity (Continued) Must also report (d) Transactions with equity holders (e.g. dividend). (e)Retained earnings at start and end of period. (f)Explanation of changes in each class of equity. A statement showing (a) to (f) is called a statement of changes in equity.

22. Slide 12.22 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 UK Statement of total recognised gains and losses (STRGL) Statement that helps to bridge the gap between income statement (profit and loss account) and balance sheet. STRGL shows the extent to which shareholders’ funds have increased or decreased from the various gains and losses of the period. Income statement (profit and loss account) only reports realised profits (the results of transactions with third parties.)

23. Slide 12.23 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 STRGL (Continued) Income statement (profit and loss account) only reports realised profits (the results of transactions with third parties.) Add to this unrealised gains and losses, e.g. Revaluations of fixed assets. Effect of exchange rates on foreign currency translation.

24. Slide 12.24 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 UK movements in shareholders’ funds Shows all changes in shareholders’ funds. Could include: Issue of new shares. Repurchase and cancellation of shares. Profit of the period. Dividends of the period. Effect of exchange rates on foreign currency translation. Revaluations of fixed assets.

25. Slide 12.25 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Dividends Reward to the owner (usually cash) Questions: 1. Does the company have sufficient cash to pay a dividend? 2. Has the company made sufficient profits (increase in ownership interest) to justify a dividend? The decision is taken by the Directors. It is approved by shareholders at Annual General Meeting.

26. Slide 12.26 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Dividends paid Might be: Dividend proposed for previous year, now paid. Interim dividend as part of dividend for current year, A ↓ – L = OI ↓ Decrease in asset of cash, Decrease in ownership interest reported in income statement (profit and loss account).

27. Slide 12.27 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Final dividend At end of accounting year, after profits have been calculated, directors decide whether to pay a final dividend and, if so, how much. This is not a liability because it has not been approved by shareholders. It is a proposal from directors. The proposal to pay the dividend is reported as an item in the directors’ report.

28. Slide 12.28 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Issue of further shares (1) Capitalisation issue (Bonus issue or Scrip issue) A company decides to increase the number of shares with no change to assets or liabilities.

29. Slide 12.29 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Capitalisation issue Share price tends to outperform the market after the announcement of a capitalisation issue. There tends to be an acceptable range of prices for listed shares. £20 per share maximum. Increase number of shares, to scale down the price per share. Capitalisation issue is often made out of reserves (of retained profits). Message given to shareholders that these are now part of the long- term funds of the company. No longer available to cover the payment of dividends.

30. Slide 12.30 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Issue of further shares (2) Rights issue When a public (quoted) company raises finance by the issue of shares, this is normally done by way of a ‘rights issue’. This gives existing shareholders the choice of subscribing for new shares in the company and so maintain their proportional shareholding in the company. The issue price is set at below the current market price of the shares.

31. Slide 12.31 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Capitalisation issue Assume that Office Owners Ltd wishes to make a 1 for 5 capitalisation issue. Share capital is 6 million 25 p shares Nominal value £1.5 million New shares: 6,000,000/5 = 1,200,000 Nominal value: 1,200,000 × 25 p = £300,000

32. Slide 12.32 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Increase in share capital £300,000 decrease in reserves £300,000 Assets – Liabilities= Ownership interest Capitalisation issue (Continued)

33. Slide 12.33 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DateTransactio n or event CashOffice block Share capital Share premium Retained earnings Reval’n reserve £000’s At 1 Jan Yr 2 Balance sheet values 8401,0151,5003004015 Jan1 for 5 capitalis- ation issue 300(300) 8401,0151,800nil4015 1,855 Capitalisation issue in Jan Year 2

34. Slide 12.34 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Rights issue Company has 400 million shares in issue of nominal value 25 pence per share. It wishes to issue a further 100 million shares. This means a rights issue of 1 for 4, for example, a holder of 8,000 shares will be given the right to subscribe for 2,000 new shares.

35. Slide 12.35 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Rights issue (Continued) A shareholder who does not wish to invest any more in the company is able to sell the ‘rights’. Assume an issue price of 150 pence per share. This is split for accounting purposes into the nominal value of 25 pence and the premium of 125 pence.

36. Slide 12.36 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Rights issue (Continued) In terms of the accounting equation the effect of the rights issue on the balance sheet is: Total cash raised by the issue £1.5 x 100 million shares = £150m Nominal value of shares issued will be 25 pence × 100 million shares = £25m Share premium on issue of shares will be £1.25 × 100 million shares = £125m.

37. Slide 12.37 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 increase in share capital £25m increase in share premium £125m Increase in cash £150m Assets – Liabilities = Ownership interest Rights issue (Continued)

38. Slide 12.38 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 (a)At the end of the month it is found that the roof has been leaking and rainwater has damaged goods worth £500. Year-end adjustments Expense of £500 for inventory (stock) damaged Inventory (stock) decreases by £500 Assets – Liabilities = Ownership interest  

39. Slide 12.39 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 (b) The business uses gas to heat a water boiler and it is estimated that consumption for the month amounts to £80. Year-end adjustments (Continued) Ownership interest=Liabilities– Assets Expense of £80 for gas consumed Obligation to pay for gas consumed £80 

40. Slide 12.40 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Illustration See Supplement to Chapter 12 in the book

41. Slide 12.41 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 12 Bookkeeping supplement

42. Slide 12.42 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DEBIT ENTRIESCREDIT ENTRIES Left-hand side of the equation AssetIncreaseDecrease Right-hand side of the equation LiabilityDecreaseIncrease Ownership interestExpenseRevenue Capital withdrawnCapital contributed Debit and credit entries

43. Slide 12.43 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Expense of £500 for inventory (stock) damaged Inventory (stock) decreases by £500 Ownership interest= Assets – Liabilities (a)At the end of the month it is found that the roof has been leaking and rainwater has damaged goods worth £500. Year-end adjustments 

44. Slide 12.44 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DrCost of goods sold£500 CrInventory (stock) of goods£500 Year-end adjustments (Continued)

45. Slide 12.45 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 (b)The business uses gas to heat a water boiler and it is estimated that consumption for the month amounts to £80. Year-end adjustments (Continued) Assets Expense of £80 for gas consumed Obligation to pay for gas consumed £80 Ownership interest= Liabilities – 

46. Slide 12.46 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Dr Expense of gas£80 Cr Accruals£80 Year-end adjustments (Continued)

47. Slide 12.47 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Illustration See Supplement to Chapter 12 in the book

48. Slide 12.48 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Current assets Inventory (stock)7,500 Cash at bank6,400 CA13,900 CL Accruals (80) Net current assets13,820 Extract from balance sheet